Loan Note: Investors lack covenant transparency, interest grows in music royalties, the firms making moves in Asia-Pacific

A new survey that reveals why investors are puzzled by covenants. Plus, the rise of speciality finance and strategic moves in Asia-Pacific. Here's today's brief for our valued subscribers only.

They said it

“Despite the economic uncertainty and limited market activity, debt funds continued to deploy capital and increase their market share.”

From the Q2 2020 MidCap Monitor report by investment bank GCA Altium in a section focusing on German mid-market leveraged buyouts

First Look

Forced into blind faith in covenants

How much visibility do investors in the European leveraged finance market have when it comes to documentation? Not much, according to a new survey from the European Leveraged Finance Association.

The trade body found that more than 90 percent of investors in Europe’s leveraged finance market have said they are either unable to accurately calculate covenant capacity or cannot determine whether their calculations are accurate because management’s calculations are not disclosed.

You would think this lack of transparency might backfire on issuers, but appetite in the market appears to be as strong as ever and there is little sign as yet that the documentation will see significant changes.

LPs look beyond the obvious

You heard it here first. Time to place your bets on speciality finance.

We hear from placement sources interest is coming not just from the usual suspects such as endowments and families – traditionally comfortable with the higher risk profile – but also from more conservative institutional investors.

There are reasons why such a shift would be taking place. In the music royalties space, for example, the absence of live music in the covid era means artists are looking to sell back catalogues to raise money. It may be more of an income rather than a traditional credit play, but who cares about semantics if the opportunity set is compelling? There is also renewed interest in anything where collateral offers downside protection – think asset-based lending and sale & leaseback transactions, for example.

One potential stumbling block is whether organisations may need to amend their investing guidelines to incorporate new strategies into the portfolio. Furthermore, there is the question of whether this can justifiably be done in a world where it’s either difficult or impossible to physically meet with managers. Reconfiguring a portfolio is a challenge in normal times, never mind in today’s ‘remote’ era.

Essentials

Eyes turn to Asia

Two major announcements from Asia-Pacific this week.

Huatai Financial (Hong Kong), a holding company owned by Huatai Securities, launched its maiden private credit fund via one of its subsidiaries in July, Private Debt Investor has learnt. Huatai Securities is one of China’s largest brokerage houses headquartered in Nanjing.

New York-based fund manager Muzinich & Co is to launch a new Asia-Pacific strategy in the next few quarters, Private Debt Investor has learnt. The initial fundraising target size for the strategy is understood to be in the range of $300 million to $500 million. It will target investments across the corporate credit structure and focus on mid-market companies with EBITDA between $2.5 million and $50 million.

LP Watch

Institution: Illinois Municipal Retirement System
Headquarters: Oak Brook, US
AUM: $43.11bn
Allocation to alternatives: 13.79%

Illinois Municipal Retirement System has approved a $25 million commitment to HIG Bayside Loan Opportunity Fund VI, according to minutes from the pension’s July 2020 board meeting.

The vehicle launched in March 2020 and is targeting $1.25 billion in equity capital. The fund’s manager is Bayside Capital, the private credit arm of HIG Capital.

This commitment from IMRF marks the culmination of the pension’s private debt manager RFP, which was issued in May 2020 and resulted in Bayside winning the mandate on offer.

The $43.11 billion US public pension has a 0.3 percent allocation to private debt.


Today’s letter was prepared by Andy Thomson with John BakieRobin Blumenthal and Adalla Kim.

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